Bailing Out Brazil
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RAY SUAREZ: The rescue came in a $30 billion loan from the International Monetary Fund yesterday, the biggest bailout in IMF history. The new loan is in addition to $15 billion the IMF lent Brazil last year. For months, Brazil has suffered economic turmoil.
MAN ON STREET (Translated): It’s driving us all crazy. I’m terrified. Our currency just keeps going down, down.
RAY SUAREZ: And a financial crisis has spread through much of South America. Brazil is the continent’s largest economy, and the tenth largest in the world, with an estimated Gross Domestic Product of $500 billion per year.
Brazil’s currency, the real, has lost nearly a quarter of its value since the beginning of year. A decline in the country’s bonds, and a currency sell-off, have both been fueled by fears a leftist candidate could win Brazil’s October presidential elections.
Candidates Luiz Inacio da Silva and Ciro Gomes have criticized the country’s current free-market policies, and conditions attached to international loans.
The IMF gets its money from the world’s wealthiest countries; the U.S. is its largest donor.
Managing director Horst Koehler explained the rationale for the loan in a statement yesterday, saying: “Brazil is on a solid long-term policy trend which strongly deserves the support of the international community.”
The 15-month loan package was designed to help Brazil steady its currency, and shore up its economy. Eighty percent of the money will not be disbursed until next year. Brazil’s new administration will have to meet financial targets in order to get cash.
The loan was announced as U.S. Treasury Secretary Paul O’Neill wrapped up a trip to the region, which included stops in Argentina and Uruguay, as well as Brazil. O’Neill had recently reiterated his doubts about big international bailouts. But while in Sao Paulo Tuesday, he struck a more positive chord.
PAUL O’NEILL: That is really the responsibility of the leaders of the world: To create the conditions so that capital will come and bring with it technology and ideas everywhere in the world.
RAY SUAREZ: In Washington yesterday, the Bush administration said it was pleased with the news of the IMF move.
RAY SUAREZ: And with me now is Ruben Barbosa, Brazil’s ambassador to the United States; and Peter Hakim, president of Inter-American Dialogue, a Washington-based research group focusing on Latin America.
Mr. Ambassador, let’s start with the agreement itself. What has the IMF agreed to do? And what, in turn, has Brazil assured the international monetary fund?
RUBENS BARBOSA: Well, after an analyzing the state of the Brazilian economy, the IMF negotiated an agreement through which $30 billion will be transferred to Brazil in two stages: $6 billion this year and $24 billion next year, provided that sound economic policies would be applied — this year with the present government and next year with the new government because we will have an election in October next.
RAY SUAREZ: When we say transferred $6 billion, literally $6 billion will go to the Brazilian government? How does that work?
RUBENS BARBOSA: Well, these will be inter-banking operation, $6 billion will go to the Brazilian treasury through the central bank.
And the money will help to keep the currency stable and avoid speculative attacks on the currency. And these will help to stabilize the economy.
RAY SUAREZ: Through being loaned, through being spent, or just being there as sort of security?
RUBENS BARBOSA: Yes, sort of security, because if need be, the central bank, the Brazilian central bank can inject the money in the economy, in the markets to sell dollars, to sell foreign currency to support a stable currency and to help Brazilian and foreign companies in who need to buy dollars to repay loans abroad.
RAY SUAREZ: Peter Hakim, given what has been prevailing the Brazilian economy in recent months, is this the medicine?
PETER HAKIM: I think so. What we’ve seen in Brazil is a general crisis of confidence from the international financial community.
This happened during the period the Brazilian economy was performing reasonably well. It was attracting investment from abroad, it was attracting loans, investment domestically.
And I think largely having to do with the upcoming elections, the uncertainty that was generating, particularly by two candidates who seemed — the markets were uncertain about the policies they might follow.
Some contagion probably from the Argentine economic meltdown created the investors and the lenders were becoming a little bit nervous. They were demanding higher interest rates. That put increasing pressure on the Brazilian economy to come up with those higher interest rates.
And all of a sudden, you start a vicious cycle, that people want to pull their money out, and you see the Brazilian currency dropping in value, the stock market dropping in value, and what this $30 billion does, it says, look, there’s money there. You don’t have to take out your money quickly. It’s going to be there if you need it. What they’ve done, not only have they made available immediately — the $6 billion, but they’re allowing Brazil to use $10 billion more of its own reserve.
So between now and the end of this government — which is in the end of December, with the election being in October — there’ll be $15 billion more that can be drawn upon, and under the best of circumstances, they won’t have to use it.
RAY SUAREZ: Why is Brazil vulnerable to these kinds of periodic crises?
There have been years of strong growth, the hyperinflation that used to mark the economy has been brought under control, yet every now and then, whether it’s the Asian crisis moving across the Pacific or the Argentine crisis just jumping over the river plate, there’s a problem.
PETER HAKIM: Well, I think first, virtually all of the emerging markets seem to be vulnerable to this kind of crisis. We had heard Korea was the economic miracle. It faced this kind of crisis a couple of years ago — virtually all of the Asian economies, the Russian economy, the Turkish economy, so this is not in any way limited to Brazil.
I think the problem has been that when times are good, there tends to be a lot of investment, a lot of lending, probably an overinvestment and an over-lending, there’s a certain exuberance, maybe a bit irrational.
And then when the markets get nervous about that, they want their money back and you become… it becomes just the reverse, you begin to get a certain irrational loss of confidence and people want to pull the money out.
There is a certain vulnerability instability built into that that’s compounded by things like low savings rates in Brazil, which depends very heavily on foreign investment.
So there is a vulnerability when you’re connected to the international economy that comes from investors tending to over invest, lenders tending to over lend, borrowers tending to over borrow, and then people getting more concerned and a greater loss of confidence than really is justified by the economic fundamentals.
RAY SUAREZ: Now, Mr. Ambassador, you mentioned this is a two-part loan. Between the two parts comes an election.
Have the presidential candidates had anything to say about whether they will respect the terms of the agreement in order to keep that second flow of money coming next year?
RUBENS BARBOSA: Yes. The government, the current government is in contact with the candidates, and they have been kept informed about the negotiations. And two of them have already expressed their views in favor of the agreement. And today, the leading candidate in the polls was supposed to say officially his support to the agreement.
And the election introduced a big feeling of uncertainty, as Peter was saying, that not only did the economic or financial factors had an influence in the situation there; there was also a perception in the market that instability would develop after the election, and all candidates now are coming to the center.
And after the agreement with the IMF, they will pledge to continue the basics, the fundamental policies that the government is following for the last eight years.
Of course it will be changed if the opposition candidate wins, but the fundamentals of the economy will be there, and so the main lines, they will be continued in the economic policies.
RAY SUAREZ: You’ve mentioned businesses having more trouble borrowing because of this crisis of confidence, having to pay more interest in order to be able to borrow dollars.
How does this affect Brazilian consumers, a woman in a supermarket doing her daily shopping for tonight’s dinner, a wage-earner in one of the big industries making automobiles, or aircraft who gets his paycheck this coming Friday?
How are they affected by something like the currency being weak?
RUBENS BARBOSA: Well, the loan, the IMF loan is important because it will help to stabilize the currency. There was a huge devaluation of the currency in the last two or three weeks forced by speculative moves from the market.
With the money coming in, and we saw this already in the last two or three days and today, there was a large drop in the currency and this will help to stabilize the price in the economy because if the devaluation continue, Brazil imports a lot, and the prices were already going up, and we will have to revise the figures for inflation next year, not dramatically, but by one or two points, due to the high exchange rate.
So the money will help to stabilize the currency, prices will be stabilized, inflation will be under control, and this is good for the economy, for the stabilization of the economy, for the remaining period of this government and for the beginning of the first year of the next government.
RAY SUAREZ: And Peter Hakim, will the other countries in the region be watching very closely to see whether this works?
PETER HAKIM: Well, of course. I mean what happens in Brazil is vital for every country in Latin America. It’s vital in fact for the international economy generally and the U.S. will be watching closely, as well. The key to all this is is that Brazil has to grow faster.
In the long term, only through strong economic growth will Brazil really begin to be able to avoid these kinds of economic downturns, these kinds of economic vulnerability, and it needs to… and really build a strong confidence in international domestic investors and that’s what’s not happening in Brazil and in the rest of Latin America over the past several years. Growth has been very, very weak. And under the circumstances, it’s not surprising that there is a faltering of economies throughout the region.
RAY SUAREZ: But briefly, you think Brazil’s a good bet in.
PETER HAKIM: Brazil is as good a bet as any, yes.
RAY SUAREZ: Peter Hakim, Ambassador Barbosa, thank you both very much.